This is not an exhaustive list of all the terms related to angel investing. If you have any other ideas, please do not hesitate to contact us at email@example.com
Common stock- A class of stock belonging to the founders and the employees of a startup. The most basic unit of equity ownership.
Convertible note or debt- A form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor is loaning money to a startup and instead of a return in the form of principal plus interest, the investor expects to get equity in the company.
Debt- A loan from investors that is never meant to be paid back. It is intended to convert into stock at a future date, based on some to-be-determined price. It assumes that you’re investing in a fast-growing company that will raise subsequent financing rounds quickly.
Dilution- As companies grow and become more valuable, they take in more outside funding. The new investors take equity in the company, reducing the amount that current shareholders own. If a new investor buys 20% of the company, the existing shareholders get diluted 20%. Even though founders generally want to avoid dilution, it’s inevitable and it means they have a smaller piece of a more valuable whole.
Equity- Stock and an ownership stake in a company. An ownership position.
Equity round / priced round- An offering and sale of newly-created stock in a company at an agreed-upon per share price.
Post-money valuation- The value of a company after a fundraising round, calculated by adding the amount raised to the pre-money valuation.
Preferred shareholder- A class of shareholders that have greater claim to the company’s assets than common stockholders and have additional rights. They are first in line to collect a payout if an exit that’s lower than the company’s valuation occurs (i.e., bankruptcy or mergers/acquisitions).
Pre-money valuation- The value of a company before a fundraising round.
Pro rata- A right to invest more capital to preserve your ownership stake in a company as it raises additional rounds.
SAFE- Stands for Simple Agreement for Future Equity. A simple mechanism to make an investment in an early-stage startup. With a SAFE, you are buying the right to buy into a future equity round at a cheaper price.
Term sheet- An agreement in principle that outlines the terms of an investment deal. It is not a contract or a promise to invest, and thus is not binding and does not mean that the investment deal is completed. Think of it as a signal that investors are interested. Some investors only offer term sheets if they’re committed and certain they want to invest (like us at Accomplice); others offer term sheets more freely.